You’ll Work Until You Die And You’ll Like It
We all define retirement differently. For most, it probably involves an island somewhere, a hammock, a good book, and a glass of wine sitting next to you as you relax for the first time in a long time. Today, paper asset experts discuss why for so many people across the globe this is a dream they’ll never realize, and how the 401(k) was never designed to make you rich.
As Tom Wheelwright, Rich Dad Advisor on taxes says, “These government-qualified retirement plans provide temporary tax benefits, but they’re also the reason most people will never be able to stop working for money.”
Today millions of baby boomers all over the world are in the same predicament that my poor dad was. The crisis will be their retirement. The good news is that most will live longer than their parents did. The bad news is, most will run out of money during retirement.
Everything changed when Nixon took the dollar off the gold system in 1971. This was the beginning of the end of the economic stability of the American family. Since then, we’ve had three of the worst recessions since the Great Depression, continual devaluation of the US dollar, wild swings in interest rates and unemployment rates, and the collapse of the pension system.
As a counteract to growing instability, the Revenue Act of 1978 was passed, allowing employees to save money tax-deferred for retirement. Then in 1981, it became legal for paycheck deductions for 401(k) plans. By 1983, nearly half of all major corporations had already switched or had been considering offering 401(k) over traditional pension systems.
This is why the creation of the 401(k) in 1978 is significant. The 401(k) shifted the responsibility of an employee’s retirement from the employer to the employee. If the employee ran out of money or lost money in a crash, the corporation was no longer responsible to pay the employee a paycheck for life. In 1978, millions of baby boomers suddenly became passive investors without any financial education.
You’ll Work Until You Die—And You’ll Like It
When I was growing up, there was a common narrative for most Americans. You would go to a good school, major in an area where you wanted to build your career, get a good job at a reputable company, work your way up the corporate ladder, and retire on a nice pension in your sixties.
For the most part, this was the stable reality of the majority of Americans. There was an unspoken contract between corporations and their employees. You spend your life working hard for us and we will take care of you in retirement. It was the norm to spend twenty or thirty years with a company and uncommon to move around.
Today with low to negative interest rates, printing money, and a stock market bubble, it appears many managed retirement funds are in serious trouble.
My Rich Dad Advisor on paper assets, Andy Tanner says, “One of the major issues that I have with the 401(k) retirement plans is the tremendous amount of risk that is piled on the investor, yet they have virtually no control of that investment to manage the risk. Even if a person is diversified across the stock market, they’re still susceptible to a stock market crash – a crash they cannot control.”
In a recent interview on The Rich Dad Radio Show, Andy went on to explain his opinion on the 401(k):
A 401k plan is a tax to be poor when you’re old. It’s a plan to be poor because a couple of things are going to happen. Number one, you’re going to take investor risk, but pay employee taxes. That’s very important because these guys that are investors are going to pay a lower rate of tax than an employee because they’re willing to take more risk as an investor. So they’re going to take an investor-type risk but pay employee taxes. Because that money taxes employees than it’s invested, and then when they pull it back out, they have to pay taxes.
Then the second thing I’ll say, it’s a plan to be poor because the lure or the attractiveness of it is, “Well, when you’re old, you’ll be poor and you’ll be in a lower tax bracket.” And so if you plan to be poor, the 401k is for you.
Myth: Paying Taxes Later Is Better Than Paying Taxes Today
Self-employed Retirement Plans (SEP’s), IRAs, 401(k)’s, and, in Canada, RRSPs. Except for the Roth IRA and Roth 401(k), these vehicles primarily rely on the time-honored tradition that paying taxes later is better than paying taxes today. In each of these (except Roth’s), the taxpayer receives a deduction today for their contribution to the plan, the investments grow tax-deferred while in the plan, and are taxed at ordinary income rates when withdrawn from the plan. Sounds like a great plan, right? Wrong!
Tom Wheelwright gives his opinion on these plans and their so-called tax benefits:
The tax benefits rely on the premise that when you retire, you will be in a lower tax bracket than you are now. Unfortunately, this is true for many people who use these vehicles, because they will retire poor. However, if you want to retire rich, you will likely be in a much higher tax bracket than you are now. Why? You will have fewer deductions. No business deductions (remember, you are retired), no dependent exemptions, no home mortgage interest. And you probably want to have more income available when you retire than when you are working because you have places to go and things to see.
Secondly, you have very little control over the funds. Who has control? The government. They control what you can invest in, how much you can add to your investment, and when you can take it out. I find that this lack of control normally results in lower returns.
Finally, you can’t take advantage of other tax-advantaged investments. For example, you cannot receive the tax advantages (e.g., depreciation) from real estate to produce lower taxes from your other income. You don’t receive capital gains treatment from dividends and long-term stock gains. And, if you do invest in a business (a very complicated matter within a tax-deferred plan), you are severely restricted as to your operating entity.
My gripe with SEP’s, IRAs, 401(k)’s, and RRSPs is that the financial institutions and the government push them so hard that people think they are the ONLY alternative. There are many other ways to save taxes that are much better for many people.
Back To Rich Dad Retirement Basics
In a world where you could potentially be living much longer, it’s vital that instead of spending your entire life working for money, you must instead have your money work for you your entire life.
This means moving from the left side of the CASHFLOW Quadrant, the employee and self-employed side, to the right side, the business and investor side.
This is one of the most fundamental concepts of the Rich Dad philosophy on money. By building businesses or investing in assets that provide passive cash flow month in and month out, you provide the security you need to have a robust retirement.
The good news is that having your money work for you allows you to still pursue many different passions and hobbies (and maybe even get paid for them), but in a way, that allows you to be financially secure and not dependent on those activities to keep you financially afloat.
Editor, Rich Dad Poor Dad Daily